International Business Machines Corp. (IBM) Analysis
IBM, the granddaddy of technology has evolved over the years. It is hard to imagine where technology would be today without the existence of IBM. This company is responsible for more patents and innovation that any other computer company. Today, IBM is no longer just a hardware company that most of us have come to known IBM has evolved into one of the most powerful technology consulting company in the world. Let’s take a closer look at IBM.
One of the most obvious strength of IBM is its size and resources. With over 400,000 employees throughout the world, IBM is truly a Multi-National Corporation. In recent years, IBM has invested heavily in India and China to take advantage of the lower labor cost. Moreover, their investment in these two countries has allowed IBM to reap the benefits from the outsourcing boom. We hear a lot about companies like Infosys (INFY) when it comes to outsourcing, but IBM is one of the biggest in the business.
For a large company, IBM has proven it can change direction fairly quickly. One example, after realizing the margin in their hardware business no longer justifies its existence, IBM sold off their PC business to Lenovo and their disk drive business to Hitachi. We were impressed by this move as hardware was what IBM has been known. However, it was refreshing to see a company this large make the right decision at the right time. While IBM still competes in the hardware business, it is mainly focused on the high end where the margin is still high.
Another strength we see is IBM service/consulting business. This is where the real money is made. In fact, 70 percent of the company’s revenue is from this area. Using the company’s size and resources to its advantages, IBM has been able to win large multi-year deals. We believed IBM consulting business will continue to do well due to the current landscape of economic expansion. In our view, no other company has been able to come close to matching IBM’s reach in this area. From systems integration to general technology consulting, IBM has the resources to continue to dominate. We should also mention software is also a major portion of IBM's revenue. Licensing revenue continues to grow.
Stock outlook
We believed IBM is one of the strongest companies in the technology sector and it is also the cheapest among its peer. IBM stock trades at 13.7 times expected 2008 earnings compared with an average multiple of about 15 for stocks on the Standard & Poor's 500 Index. Hewlett-Packard Co., which competes with IBM in computer hardware, trades at 14.6 times expected 2008 earnings per share, while services rival Accenture Ltd. has a multiple of 17.7 (AP, 2007).
According to Reuters, a price-to-earnings multiple of 15 would mean a price of $110, based on expected 2008 earnings per share of $7.34 before certain items. Trading shy of $100 per share, we believed IBM is a value stock with more room to the upside. If you’re looking to put your money in a relatively safe blue chip company, we would certainly recommend taking some position in IBM at this level. Keep in mind, this is not a company that will grow like Google, but over the long haul, IBM will prove to be a great investment.
Comments
This article is so full of holes I can't breathe: IBM has over 400,000 employees, not 100,000. IBM very much did -not- "sell off their hardware business to Lenovo and Hitachi." IBM sold only the PC business to Lenovo and the disk drive business to Hitachi. IBM still manufactures the broadest array of "hardware," including components -and- finished systems, of -any- IT company. It has one of the largest chip foundries on the planet.
Posted by: Fred nglish | January 30, 2007 07:47 AM
Fred, thanks for correcting us. We sometime forget how big IBM really is and yes, you are correct about their PC business to lenovo and disk drive to Hitachi. We stand corrected.
One thing about our readers, you folks are sharp!
Posted by: ibooyah | January 30, 2007 10:29 AM